‘Perfect storm’ fuels cheese prices

By LEE MIELKE

For the Capital Press

Published:January 10, 2014 10:36AM

Last changed:January 10, 2014 2:27PM

Lee Mielke

Lee Mielke wraps up the week's dairy news.

Temperatures in Chicago were below those at the South Pole this week, but things got pretty heated at the Chicago Mercantile Exchange. Cash dairy prices start 2014 well above where they were a year ago, especially on the cheese and powder side of things, and Class III dairy futures soared.

Much of the U.S. has been gripped by record low temperatures, wind and snow, raising havoc not seen in decades. It’s the, pardon the pun, “perfect storm,” literally, with anecdotal reports typical of what goes on in such situations — milk is dumped, pipes freeze, to name just a few, plus the after effects this weather will have months down the road regarding crops, cattle, calf losses and calving intervals. Add to that the upcoming biggest cheese consumption day of the year, Super Bowl, plus a reported cheese shortage on the world market, meaning strong U.S. cheese exports, plus some milk supply concerns here at home and good cheese demand and you have some good kindling.

FC Stone analyst Joe Kobel told me that cheese manufacturers “went into December relatively light on inventory, betting that prices would tumble and inventories could be built at lower price levels but that was not the case.”

Risk management advisor Chris Hildebrand says cheese makers are producing for Super Bowl demand, which he expects should be filled soon. And the Dairy Export Council reported record-high cheese exports in November, up 54 percent from a year earlier.” Demand for U.S. cheese also rose as New Zealand “moved more of its milk into powder for China.”

The Cheddar blocks closed the second Friday of 2014 at $2.20 per pound, up 15 3/4-cents on the week, up 20 cents since the first, and 48 cents above a year ago. The record is $2.2850 on May 23, 2008. The barrels re-established a normal spread, closing at $2.16, up 24 cents on the week and 48 3/4-cents above a year ago. Two cars of barrel was the only cheese sold. The AMS-surveyed U.S. average block price hit $1.9579, up 4.6 cents. Barrels averaged $1.9666, up 6.8 cents.

Jerry Dryer wrote in his Jan. 3 Dairy and Food Market Analyst that he’s “getting mixed signals on price trends,” but reported that “retail cheese restocking is high on the priority list in preparation for playoff and Super Bowl parties.” Exporters tell him they are pretty much booked through the first quarter, so “It looks like markets will be supported at these elevated levels for at least several more weeks” and maybe longer. He points out that block and barrel cheese production in November slipped 2.7 percent below a year ago after being down 0.5 percent in Oct and 0.7 percent in September.

Also feeding the bulls, Dryer points out that milk cow numbers have declined, and he posed the question: “Has heavy culling overwhelmed the heifer supply?” He reasons that USDA reports that as of Jan. 1, 2013, there were 2.928 million heifers that were expected to calve during 2013 on farms in the USA. As of Nov. 30, 2013, 2.868 million cows had been culled. Factor in a death loss, adjust for the change in the herd size and the need for replacements through the end of November exceeded the estimated supply by 176,000 head.

“If the USDA estimates are correct,” Dryer suggests, “Milk producers ran out of replacements sometime in November. Everyone with an opinion; however, agrees: USDA’s replacement heifer estimates are consistently low. But the supply of potential milk cows was still very tight by yearend.”

However, what goes up must come down. But when? FC Stone dairy broker Dave Kurzawski cautioned that “the four most dangerous words in using markets is this time it’s different.” He added the caveat; “There are some differences out there and there are some issues of supply-demand imbalances on dairy commodities both domestically and internationally.”

While he says he has concern going into February and March, which is a typically slower U.S. demand time and a “pushback from U.S. consumers,” he still thinks “the underpinnings of the market are largely bullish” and looks for the market to trade in the $1.90-$2.20 per pound area for the foreseeable future. He added that “issues in dairy farm economics are a little bit different than they have been in the past” and “even with good profit margins I just don’t think many of the dairy producers are going to respond as quickly as they have in the past.”

Cash butter also saw more gains the first full week of 2014, closing at $1.6750 per pound, up 10 1/2-cents on the week and 22 cents above a year ago. Seven cars were sold on the week. AMS butter price averaged $1.5698, down 0.3 cent.

Cash Grade A nonfat dry milk closed Friday at $2.07, up a quarter-cent on the week. Extra Grade closed at $2.09, down a penny. AMS powder averaged $2.0029, up 2.4 cents, and dry whey averaged 59.75 cents, up 2.6 cents.

Meanwhile, November 2013 U.S. milk production was only up 0.3 percent compared to a year ago, so that translated into small increases in cheese output, a small decline in butter, and sizable drop in powder production for the month, according to USDA’s latest Dairy Products report.

California’s February Class I milk price is $23.11 per hundredweight for the north and $23.38 for the south. Both are up 27 cents from January and are $3.28 above February 2013. The federal order Class I base price will be announced by USDA on Jan. 23.

Butter production totaled 143 million pounds, down 2.3 percent from October and 0.1 percent below November. Nonfat dry milk output totaled 100 million pounds, up 16.7 percent from October but down 13.6 percent from a year ago.

American type cheese, at 355 million pounds, was down 3.7 percent from October and 2.7 percent from a year ago. Italian type cheese output came to 415 million pounds, down 4 percent from October but 7.8 percent above a year ago.

Total cheese production amounted to 941 million pounds, down 3.1 percent from October but 2.9 percent above a year ago.

Global dairy picture

Checking internationally, the first Global Dairy Trade (GDT) auction of 2014 saw the weighted average for all products slip 0.8 percent, led by a 3.4 percent decline in skim milk powder, a 1.8 percent slip in anhydrous milkfat, and 0.6 percent decline in whole milk powder. Butter was up 5.1 percent, Cheddar cheese up 1.9 percent, and milk protein concentrate was up 5.2 percent.

The average butter price equated to about $1.9155 per pound, up from $1.8375 per pound in the last event ($1.8688 per pound on 80 percent, up from $1.7927). The Cheddar average was $2.1119 per pound, up from $2.0725.; skim milk powder, $2.1264 per pound, down from $2.2081; and the whole milk powder average was $2.2380 per pound, down from $2.2489 in the last event. FC Stone dairy broker Dave Kurzawski says, “Nothing on the GDT would indicate much cooling off on the world stage.”

In other world market news, final numbers won’t be available until February but the U.S. set a dairy export record in 2013, shipping $6.1 billion worth of product in the first 11 months alone, according to the U.S. Dairy Export Council, up 17 percent from the entire year of 2012 and is likely to be about 30 percent more, or $6.7 billion, when year-end data is issued next month.

“The past year marked a major step in U.S. dairy export expansion, not only because of the value and volume gains, but because of the activities of U.S. suppliers and industry organizations to lay the groundwork for future growth,” says Tom Suber, USDEC president.

A USDEC press release stated that “In one sense, 2013 is simply another stop along the way in the evolution of the United States as a consistently significant global dairy supplier,” adding that “While favorable pricing and supply shortages in New Zealand may have accelerated growth in 2013, overall U.S. performance was not surprising given long-term trends.”

Farm bill outlook

In dairy politics, one of the issues stalling the new Farm Bill is the Dairy Title. Sources on Capitol Hill say Speaker of the House John Boehner, R-Ohio, has informed conferees that he will not allow a Farm Bill that includes supply management to pass the House.

The International Dairy Foods Association reports that conferees had targeted the second week of January to finish negotiations, but chances are now good that a conference report will not be filed until later this month.

IDFA says, “With the so-called stabilization program seemingly off the table, news reports are saying that the conferees are seriously considering a compromise proposal that would provide dairy farmers with the option of participating in either the existing Milk Income Loss Contract (MILC) program or the new margin insurance program that was included in both the Senate dairy title and the Goodlatte-Scott amendment that is now the House dairy title. This proposal was revealed several weeks ago by two economics professors, John Newton and Cam Thraen, of Ohio State University’s Department of Agricultural, Environmental and Development Economics.”

“In The Dairy Safety Net Debate of 2013 Part II, Questions and Answers, the professors say combining a modified MILC program with a revised margin insurance program would hold down taxpayer costs and provide a better way forward for dairy than proposals offered by the House and the Senate.”

“A combination of MILC and margin insurance offers more choices to accommodate the assortment of U.S. dairy farm operations,” the authors said. “By limiting both the amount of income support and adverse gaming incentives, our independent analysis reveals MILC-Insurance could cost significantly less than the currently debated margin insurance programs.”

Rep. Bob Goodlatte, in a press release issued Jan. 9, stated: “The House of Representatives’ resounding rejection of supply management provisions in the dairy title of the Farm Bill speaks loud and clear. More than 140 diverse groups have joined with 291 House Members, including 95 Democrats, in voicing their opposition to supply management. A supply control program that will directly intervene in markets and increase milk prices will ultimately hurt dairy producers and consumers.”

Rep. David Scott, D-Ga., added that the media is portraying the dairy policy debate as a “struggle solely between Speaker Boehner and Ranking Member Peterson.”

“Nothing could be further from the truth,” Scott said.

Dean suit reinstated

In other news, UPI reported that a federal appeals court reinstated an antitrust suit against Dean Foods that alleges the company conspired to drive up milk prices in the Southeast United States. All five counts of the suit, filed by grocery chain Food Lion and others, had previously been dismissed. Court documents indicate Dean Foods was acquired in 2001 by Suiza, the nation’s largest milk bottler.

At the time, Dean got most of its milk from independent farmers, while Suiza got a large portion of its milk from National Dairy Holdings, a subsidiary partially owned by the Dairy Farmers Association (DFA). As part of the merger, the U.S. Justice Department required Suiza to sell its stake in National Dairy Holdings to DFA.

Food Lion and the other plaintiffs charged that while National Dairy Holdings was set up to compete with Dean Foods, it actually had a conflict of interest because DFA also had contracts with Dean Foods. DFA sold National Dairy Holdings to a Mexico-based dairy processor, Grupo Lala, in 2009.

The appellate court’s reversal of the lower court’s ruling reinstates count one of the suit that alleges the relationship between Dean and National Dairy Holdings was a “conspiracy not to compete.”

“It’s a lengthy process,” the article warns. “It will certainly not be completed in 2014, but nonetheless, after trying every method possible to get the much-needed changes to the California system, whether through administrative hearings, legislation, or even a lawsuit, California dairy families appear to be very focused on going down this path to a federal order.”

“Producers certainly have questions about this process, many of those focused on how it will handle our state quota program or how the pooling rules will be different. While we don’t know all the answers yet, they are certainly all solvable issues, and I expect that the coming months will bring a lot of clarity to this process,” the article concludes.

Resignation

Ending on a sad note, DairyBusiness Update editor Dave Natzke announced his resignation this week. In his final issue Friday, Natzke wrote “It has been my pleasure serving as editor of DairyBusiness Update (and its predecessor, Dairy Profit Weekly) for more than 10 years.”

“Looking back, my first issue as editor was June 9, 2003. For those readers with long memories, the topics making the news that week concerned California Department of Food and Agriculture milk pricing policy changes, and the U.S. Food and Drug Administration regulation of new “dairy beverage” standards of identity and how they fit under the federal milk marketing order pricing system. (My how things haven’t changed.)

“Things do change, however, and DairyBusiness Update is no exception. I am making a career change, effective Jan. 13, so this will be my last issue as DairyBusiness Update editor.”

Dave Natzke is one of the most respected dairy journalists in the country and it has been my pleasure to have worked with him all these years. I wish him well. He can be reached at dnatzke@charter.net.